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FTC and DOJ Release Report on Antitrust Enforcement and Intellectual Property Rights

April 27, 2007

On April 17, 2007, the Federal Trade Commission and Department of Justice issued a long-awaited joint report on Antitrust Enforcement and Intellectual Property Rights. The 220-page Report is the result of years of research by the DOJ and FTC, including two dozen days of hearings in 2002, and reaches a number of conclusions concerning six areas addressed below. The Report reaffirms enforcement policy set forth in the FTC and DOJ's 1995 Antitrust Guidelines for the Licensing of Intellectual Property. Notably absent from the Report's analysis is an evaluation of the settlement of patent disputes under the Hatch-Waxman Act between brand manufacturers and generic manufacturers.

(1) Unilateral refusals to license patents. On the issue of unilateral refusals to deal, the Report suggests that neither the Ninth Circuit's 1997 Kodak decision (125 F.3d 1195), focusing on subjective intent, nor the Federal Circuit's 2000 Independent Service Organizations Antitrust Litigation decision (203 F.3d 1322), with language broadly suggesting that a refusal to license a patent cannot violate the antitrust laws absent "illegal tying, fraud in the Patent and Trademark Office, or sham litigation," provides the right approach. It notes that imposing antitrust liability for mere refusals to license competitors would compel firms to assist their rivals contrary to existing antitrust law and policy as reflected in the Supreme Court's opinion in Verizon v. Trinko, 540 U.S. 398 (2004). Additionally, liability in such circumstances would restrict the patent holder's ability to exercise the right to exclude, which is the core right of an issued patent. Leaving room for further debate and disputes, the Report concludes that conditional refusals to license that cause competitive harm could be subject to antitrust liability, but that "[a]ntitrust liability for mere unilateral, unconditional refusals to license patents will not play a meaningful part in the interface between patent rights and antitrust protections."

(2) Standard-setting organizations. The Report's treatment of the activities of standard-setting organizations (SSOs) focuses on the ex ante aspects of licensing in the standard-setting context. The Report concludes that joint negotiation of licensing terms by SSO participants before the standard is set can be procompetitive and is unlikely to constitute a per se antitrust violation. The FTC and DOJ will usually apply a rule of reason analysis when evaluating these joint activities, which are most likely to be reasonable even if the adoption of a standard will create or enhance market power for a patent holder. In this finding, the FTC/DOJ Report is consistent with Recommendation No. 20 issued by the Antitrust Modernization Commission in its April 2, 2007 Report and Recommendations (AMC Report) that "Joint negotiations with intellectual property owners by members of a standard-setting organization with respect to royalties prior to the establishment of the standard, without more, should be evaluated under the rule of reason."

The FTC/DOJ Report also concludes that an intellectual property owner's unilateral announcement of licensing terms does not violate section 1 of the Sherman Act and that, without more, a unilateral announcement of price terms does not violate section 2 of the Sherman Act. The Report also explains that bilateral ex ante negotiations between an individual SSO member and an individual intellectual property holder that take place outside of the SSO context are unlikely to require any special antitrust scrutiny.

(3) Cross-licensing agreements and patent pools. With regard to patent pools and cross-license arrangements, the Report concludes that the FTC and DOJ will continue to evaluate the competitive effects of cross-licenses and patent pools under the rule of reason framework of the 1995 IP Guidelines. Consistent with a series of DOJ Business Review Letters issued since the 1995 IP Guidelines, the Report draws a distinction between patent pools that include complementary patents versus pools containing substitute patents. The Report explains that pools combining complementary patents are generally procompetitive. By comparison, pools including substitute patents, while not presumptively anticompetitive, will be evaluated on a case-by-case basis to ascertain the competitive effects. The competitive significance of a pool's licensing terms will be analyzed on a case-by-case basis considering both their procompetitive benefits and anticompetitive effects. The FTC and DOJ will not generally assess the reasonableness of royalty rates set by a pool.

(4) Certain licensing practices. The Report addresses certain intellectual property licensing practices, such as non-assertion clauses, grantbacks, and reach-through royalty agreements. The Report indicates that, consistent with the 1995 IP Guidelines, the FTC and DOJ will continue to apply a rule of reason analysis in evaluating these types of agreements.

(5) Tying and bundling of intellectual property rights. With regard to the tying and bundling of IP rights, the Report announces that the FTC and DOJ will continue to follow the 1995 IP Guidelines. In accordance with the 1995 IP Guidelines, the FTC and DOJ will consider both the anticompetitive effects and the efficiencies attributable to a tie, and would be likely to challenge a tying arrangement if: (1) the seller has market power in the tying product, (2) the arrangement has an adverse effect on competition in the relevant market for the tied product, and (3) efficiency justifications for the arrangement do not outweigh the anticompetitive effects. Consistent with the 1995 IP Guidelines and the Supreme Court's decision last year in Illinois Tool Works, 126 S. Ct. 1281 (2006), the agencies will not presume market power from the existence of a patent. In requiring proof of an adverse effect on competition in the market for the tied product and allowing consideration of efficiency justifications, the agencies effectively apply a rule of reason analysis in their enforcement decisions regarding tying, consistent with some recent court decisions, notwithstanding long-standing application of the per se rule in the courts where there is market power in the tying market. The Report also explains that if a package license constitutes tying, the FTC and DOJ will treat it under the same principles used to analyze other types of tying arrangements.

(6) Practices that extend the market power conferred by a patent beyond its statutory term. In the final section, the Report addresses competitive issues regarding practices that extend the market power conferred by a patent beyond its statutory term. In particular, the Report addresses collecting royalties beyond the term of the patent, long-term contracts involving exclusivity, and bundling of patents with trade secrets. The Report explains that the starting point for evaluating such practices is analyzing whether the patent in question confers market power and concludes that standard antitrust analysis applies. If the patent in question confers market power, these practices will be evaluated under the traditional rule of reason framework, unless the agencies find a particular practice to be a sham cover for naked price fixing or market allocation. While noting that prior Supreme Court precedent has found a patent owner's collection of royalties beyond a patent's statutory term to be per se unlawful, Brulotte v. Thys, 379 U.S. 29 (1964), the Report implicitly questions the application of the per se rule in this context by suggesting that such a practice can be efficient.

The AMC Report. In its more general review of the antitrust laws, the Antitrust Modernization Commission finds that there is no need to revise the antitrust laws to apply different rules to new economy industries in which innovation, intellectual property and technological change are central features. The AMC Report also concludes that in such industries, "just as in other industries, antitrust enforcers should carefully consider market dynamics in assessing competitive effects and should ensure proper attention to economic and other characteristics of particular industries that may, depending on the facts at issue, have an important bearing on a valid antitrust analysis."

For Further Information

For further information regarding application of antitrust laws to issues relating to intellectual property, please contact Antitrust & Competition Co-Chairs Edward G. Biester or Wayne A. Mack, Intellectual Property Chair Lewis F. Gould, Jr., any other member of our Intellectual Property Practice Group or any other member of our Antitrust and Competition Practice Group, or the attorney in the firm with whom you are in regular contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.